White Space Revisited: Creating Value through Process

White Space Revisited

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White Space Revisited Creating Value Through Process

GEARY A. RUMMLER ALAN J. RAMIAS RICHARD A. RUMMLER

FO R E WO R D BY PAU L H A R M O N

Copyright © 2010 by John Wiley & Sons, Inc. All rights reserved. Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741—www.josseybass.com No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. Requests to the publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at www.wiley.com/go/permissions. Readers should be aware that Internet Web sites offered as citations and/or sources for further information may have changed or disappeared between the time this was written and when it is read. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-3986, or fax 317-572-4002. Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Rummler, Geary A. White space revisited: creating value through process / Geary A. Rummler, Alan J. Ramias, Richard Rummler; foreword by Paul Harmon. p. cm. Includes bibliographical references and index. ISBN 978-0-470-19234-4 (cloth) 1. Industrial productivity. 2. Value added. 3. Performance. 4. Organizational effectiveness. I. Ramias, Alan J., 1947- II. Rummler, Richard, 1961- III. Title. HD56.R864 2010 658.5'15—dc22 2009035519 Printed in the United States of America FIRST EDITION

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GEARY Once again, for the girl from Ann Street. Without you, none of this would have happened. ALAN AND RICK To Geary Rummler, exceptional leader, patient mentor, tireless innovator, wise and generous friend and father.

CONTENTS

List of Figures and Tables Foreword by Paul Harmon Preface by Geary A. Rummler Acknowledgments About the Authors

ix xiii xvii xix xxi

Introduction

1

PART ONE White Space Revisited

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1 2 3 4 5

The Silver Anniversary of Process Process in a Value Perspective The Value Creation Hierarchy Developing the Value Creation Architecture of a Business Process Management in the Value Creation Context

7 23 39 77 97

PART TWO Designing or Improving the Value Machine

117

6 7 8 9 10

119 141 177 187 199

A Framework and Methodology for VCS Design RPM Project Walk-Through: Align, Analysis, Design RPM Project Walk-Through: Commit, Build, Enable, Adopt Other RPM Applications Designing Improvement Capability

PART THREE Implications

11 Process and the IT Department 12 Summary

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211 229

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Afterword List of Acronyms Notes Index About Performance Design Lab

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Contents

235 237 239 245 251

LIST OF FIGURES AND TABLES

FIGURES Figure 1.1

The Organization as a System

10

Figure 2.1

The Four Key Requirements of a Business

25

Figure 2.2

The Resources Fixation

25

Figure 2.3

The Value Machine

28

Figure 2.4

Value Creation Hierarchy

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Figure 2.5

The VCH with Performance Goals

36

Figure 3.1

The Components of a Process

40

Figure 3.2

Value Creation Hierarchy

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Figure 3.3

The Belding Engineering Organization

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Figure 3.4

The Value Creation Hierarchy: Enterprise Level

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Figure 3.5

The Super-System Map

49

Figure 3.6

The Primary Processing Systems of an Organization

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Figure 3.7

Value Creation System Choices of Belding Engineering

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Figure 3.8

Value-Resource Relationship Map

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Figure 3.9

The VCH with Contributing Sub-Systems

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Figure 3.10 Cross-Functional Value Creation Map

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Figure 3.11 Cross-Functional Process Map

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Figure 3.12 Process Map with Technology Swimlanes

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Figure 3.13 Resource-Centric and Value-Centric Approaches to Process Definition

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Figure 3.14 Alternative Views of Business as a Value Machine

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Figure 4.1

Templates Used for Value Creation Architecture

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Figure 4.2

Example of Business Process Framework

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Figure 5.1

Performance Planned and Managed System

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Figure 5.2

Detailed Performance Planned and Managed System

99

Figure 5.3

Work/ Work Management System

100

Figure 5.4

Managing Two Dimensions

102

Figure 5.5

Belding Engineering Value Versus Resource Dimensions

104

Figure 5.6

Performance Planned Process

105

Figure 5.7

Order-to-Cash Process Performance Data

107

Figure 5.8

Performance Planned Sequence

110

Figure 5.9

VCS Performance Data

112

Figure 6.1

The Past and Future of Process Improvement

120

Figure 6.2

The Effective Process Framework

123

Figure 6.3

The VCH and Key Variables Requirements

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Figure 6.4

The Human Performance System

129

Figure 6.5

The Ideal HPS

130

Figure 6.6

The Technology Performance System

132

Figure 6.7

RPM Project Structure

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Figure 6.8

RPM Critical Success Factors

139

Figure 7.1

Sterling Publishing Organization Chart

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Figure 7.2

Sterling Publishing “Is” Value Creation System

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Figure 7.3

Sterling Publishing “Is” Cross-Functional Process Map

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Figure 7.4

“Should” Design Specifications

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Figure 7.5

“Is” Versus “Should” Assumptions

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Figure 7.6

“Should” Macro Process Design

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Figure 7.7

“Should” Role-Responsibility Matrix (excerpt)

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Figure 7.8

“Should” Details Document

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Figure 7.9

“Should” Measures Chain

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Figure 7.10 “Should” Management Domain Matrix (excerpt)

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List of Figures and Tables

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Figure 7.11 Process Management Tracking

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Figure 7.12 “Should” Change Requirements Document

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Figure 7.13 “Should” Enablers Chart

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Figure 7.14 Macro Implementation Plan

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Figure 9.1

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A Well-Designed Process

Figure 10.1 Infrastructure to Support the Change Process

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Figure 10.2 Improvement Process Overview

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Figure 11.1 Example of Functionally Focused Value-Resource Map

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Figure 11.2 The Effective Process Framework

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Figure 11.3 Level at Which Workflow Mapping Is Performed

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Figure 11.4 RPM Methodology with Business and IT Roles

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TABLES Table F.1

Rummler’s Performance Matrix

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Table 1.1

The Scope and Range of Process Work

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Table 3.1

Role-Responsibility Matrix

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Table 3.2

Technology Enabler Chart (excerpt)

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Table 4.1

VCA Tool Set

82

Table 4.2

Insight Team Project Summary

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Table 5.1

Director of Finance Function Performance Measures

104

Table 5.2

Performance Management Routine

108

Table 6.1

Process Performance Variables

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Table 6.2

RPM Design Dimensions Versus EPF Variables

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Table 6.3

RPM Detail Overview

136

Table 6.4

Process Engagement Grid

137

Table 7.1

Align Phase Pitfalls/Success Factors Matrix

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Table 7.2

Analysis Phase Pitfalls/Success Factors Matrix

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Table 7.3

Design Phase Pitfalls/Success Factors Matrix

174

Table 8.1

Implementation Planning Agenda

179

Table 8.2

Commit Phase Pitfalls/Success Factors Matrix

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Table 8.3

Build Phase Pitfalls/Success Factors Matrix

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List of Figures and Tables

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Table 8.4

Enable Phase Pitfalls/Success Factors Matrix

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Table 8.5

Adopt Phase Pitfalls/Success Factors Matrix

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Table 8.6

Project Timetable

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Table 9.1

Components of Methodology

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Table 9.2

Some RPM “Methodologies”

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List of Figures and Tables

FOREWORD BY PAUL HARMON

Businesses have likely been trying to improve processes for as long as there have been businesses. One imagines that ancient Egyptian pottery shop owners worried about how to make production of pots faster, better, and cheaper. Systematic efforts at business process improvement are usually thought to have begun when Fredrick Winslow Taylor published his best-selling book, The Principles of Scientific Management, in 1911, just about the same time that Henry Ford was revolutionizing manufacturing with his ideas about a continuous production line. Throughout the early half of the twentieth century, industrial engineers carried the torch for process improvement and often met at annual Work Simplification conferences. In the years following the Second World War, process work came into its own. Factories in Asia and Europe had been destroyed in the war and needed to be rebuilt from scratch, and everyone wanted to be sure that their new factories were as efficient as possible. Quality control engineers like W. Edwards Deming and Joseph Juran played a major role in helping companies design efficient processes. In the late 1980s a group of people at Motorola combined process work with quality control techniques to create Six Sigma, a popular approach to improving the quality and consistency of processes. In 1990, James Womack, Daniel Jones, and Daniel Roos wrote The Machine That Changed the World, which reported on the huge strides that Toyota had made and coined the term lean. In a similar way, the rapidly evolving field of computing led to massive and widespread changes in the way business processes were organized. Companies had begun to use computers to automate their processes in the 1960s. In the 1980s, with the introduction of the personal computer, automation became available to managers and office workers. In the 1990s, gurus like Michael Hammer, James Champy, and Tom Davenport urged companies to reengineer their processes to take better advantages of the improvements that process-oriented computer systems could offer.

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In addition to the gurus in the quality control and automation traditions, there have always been process advocates among business management theorists. Michael Porter, for example, is known for his work on strategy and value chains, and James Heskett has led a reevaluation of how organizations relate to employees and customers. The leading guru in the management tradition, however, was Geary Rummler. Dr. Rummler began his career in Michigan in the 1960s. He earned his MBA and his doctorate at the University of Michigan and proceeded, over the course of the remaining decades of the twentieth century, to elaborate an integrated methodology for improving processes in organizations. In reality, Geary Rummler never focused on processes as such. Instead, he focused on corporate performance and on how companies could be organized and managed to produce superior performance. When I think of Rummler’s impact, I usually think first of his performance matrix, which is pictured in Table F.1. More than anything else, the matrix suggests the scope of Geary Rummler’s vision. He imagined an organization comprised of three levels: one concerned with the organization as a whole, one concerned with the specific processes the organization used to accomplish work, and one focused on the concrete activities that people and systems performed. He assumed that at each level organizations would define goals and measures, create designs for achieving their goals and measures, and establish management practices that would assure that the designs achieved the desired goals and measures. Thus, although process was extremely important to Rummler, it was always just one part of a comprehensive approach to performance improvement, and it was important only because it supported the goals of the organization. When I first started working with Geary, in the late 1960s, he was already using flowcharts to describe business processes, although he had not yet arrived at the “swimlane” diagrams that he made ubiquitous when he joined with Alan Brache to publish Improving Performance in 1990. Similarly, in the 1960s, the Activity Level of the Organization Performance Matrix was entirely focused on the employees who performed activities. Thus the Activity Level focused on how goals were defined for employees and how they were trained, managed, and motivated to perform their jobs. In the course of the 1980s and 1990s, like the rest of us, Rummler struggled to understand the role of computers in modern organizations and to incorporate software systems into the Activity Level of the Performance Matrix. Table F.1 Rummler’s Performance Matrix Goals and Measures

Design and Implementation

Management

Organizational Level

Organizational goals and measures of organizational success

Organizational design and implementation

Organizational management

Process Level

Process goals and measures of process success

Process design and implementation

Process management

Activity or Performance Level

Activity goals and measures of activity success

Activity design and implementation

Activity management

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Foreword

In the 1980s, Geary Rummler joined with Alan Brache to form Rummler-Brache and undertook a number of consulting engagements that widely influenced how people today think of process change. To provide two examples: it was during the 1980s that Rummler worked at Motorola, revising processes and teaching the process analysis techniques that laid the groundwork for Motorola’s subsequent development of Six Sigma, which marries process and quality control techniques. In a similar way, IBM practitioners took courses from Rummler-Brache and then went on to create LOVEM, an IBM business process reengineering methodology that relied on Rummler’s diagramming concepts. Today we find those same concepts in the latest flowcharting notation: BPMN. Many would emphasize the swimlanes that provide business people with insights into who is responsible for managing specific activities. In fact, the idea of always placing the customer of the process in the top swimlane and then diagramming every interaction between the customer and the business process is probably the more valuable insight. The latest approaches for improving service industry processes rely on an ability to model a customer’s activities and then change the service business’s activities to create a better customer experience. Geary Rummler achieved widespread recognition in the 1990s. Hammer, Champy, and Davenport convinced companies they needed to reengineer but didn’t provide much specific guidance about exactly how processes were to be analyzed and redesigned. Many companies, once they decided to commit to reengineering, looked around for a systematic methodology and discovered Improving Performance and the Rummler-Brache training courses. There was an irony here, since Geary Rummler was never a fan of reengineering. He had always advocated a more comprehensive, systematic approach and thought that reengineering’s emphasis on radical change would be too hard to implement. In hindsight, Rummler was right, but in the meantime a whole generation of process practitioners learned to approach process change projects using the Rummler-Brache methodology. Rummler sold his interest in Rummler-Brache and retired at the end of the 1990s. Within a couple of years, however, he realized, as he once told me, that he had “failed retirement.” There were still too many problems he wanted to investigate, too many new insights he wanted to incorporate into his performance improvement methodology. Thus, in the early years of this decade, Geary joined with a group of colleagues to create Performance Design Lab (PDL), a new consulting and training company that provided Geary an organizational base from which he could continue to explore ways to improve organizational performance and elaborate his comprehensive approach to performance analysis and organizational design. Geary Rummler died unexpectedly on October 29, 2008. In the year before his death, Geary, his son, Rick Rummler, and his longtime colleague, Alan Ramias, had begun work on a new book that would pull together all the insights they had garnered during the previous two decades. The book was nearly done when Geary died. Rick and Alan have done the entire business process community an important service by completing the book and seeing it through publication. To my way of thinking, Geary Rummler was always the performance analyst’s performance analyst. He didn’t promote himself in the way that others did and was never as well known to Foreword

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the general public as process gurus like W. Edwards Deming or Michael Hammer. On the other hand, over the course of his career, he did more to influence the way process improvement work is done today than anyone else I know. The quality control community owes the emphasis on defining processes at the core of Six Sigma to Geary’s work at Motorola. Similarly, the IT community owes its current swimlane-based, customer-focused BPMN diagrams to Geary’s efforts to create flow diagrams that business people could easily understand. We all owe Geary thanks for his relentless emphasis on process change that improved corporate and human performance. Over the years Improving Performance has been a bible to many process practitioners. Reviewers have consistently said that it was the best book to give to business managers who were looking for an introduction to process. Predictably, this new book, summarizing Geary Rummler’s latest thinking about process analysis, process management, and organizational performance, will be widely read by new managers who are trying to make their organizations more process centric, and by today’s process practitioners who are trying to figure out how to fit all the various technologies together into a whole. Isaiah Berlin famously divided great thinkers into two types: Foxes and Hedgehogs. Foxes, he explained, knew many different things, but Hedgehogs knew one big thing. Geary Rummler was a hedgehog. He knew that organizations were systems that transformed customer needs and raw materials into valuable products or services. He knew that everything was connected to everything else and that effective change required a comprehensive knowledge of how the whole system worked to achieve its goals. His vision of the performance system that used processes to create value is one of the key managerial insights of our time. Other process gurus had a similar vision, but Geary Rummler’s vision was uniquely powerful because he continually stressed the importance of a systematic, integrated approach. So many things are changing. So many new techniques become available each day. It’s very easy to get lost in the details. We are lucky to have this new book to provide us, once again, with Geary Rummler’s comprehensive vision of how we can systematically improve the performance of our organizations.

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Foreword

PREFACE BY GEARY A. RUMMLER

This Preface was found in Geary’s notes. It is rough and probably incomplete, but it contains his own words on the purpose for writing this book. What we wish to present is a view with an edge. We need to elbow our way into a crowded, noisy field. It’s sort of a “Hello! Remember, it’s still about work!” The only way a business creates value for its customers and an organization for its stakeholders is through its value-adding work processes. Unlike in the first book in 1990, which laid the foundation for the field, it is now an established, mature, and increasingly confusing field. There are endless lectures, articles, journals, conferences, and workshops devoted to process modeling tools, BPMS products, maturity models, governance models, design and improvement methodologies, process culture, business process leadership, process management, process-centered organizations. . . . But despite all this activity, the undercurrent of a recent Gartner conference [in February 2008, where Geary was a keynote speaker] was, “Where are the results?” “Is BPM a fad?”—the whole thing powered by technology and training vendors who themselves are busily maneuvering and consolidating. I guess we would say that BPM is, at best, stalled. It certainly has not realized the potential we saw in 1984 when doing our early work at Motorola. From our perspective, the BPM/process movement has gotten off track. In fact, it is even hard to find a reference to what we think are the basics: identifying and improving the work required to deliver organizational results. “Process” was not some invention to improve productivity; “process” was itself a process that started not with the work but with the results desired and worked backward from there to identify and redesign the work that must produce those results. That is the essence of industrial and process engineering. Yet the “field” of BPM seems to be all about the “means,” with no connection to the end. It’s about how to model a process, how to automate a process, how to automate the

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management system. It’s about the technology to run a process, the tools and techniques for projects, the organization culture to support a process orientation, and about BPM leadership. Which leaves us far off track from the core concept—which is about work. We think it is way past time to get back to some basics: like understanding the organization results we are trying to deliver, realizing that there are no shortcuts to value creation in any business, and identifying, designing, and managing the work required to achieve those results—and treating process as the best-known way to engineer those results. Thus this book . . .

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Preface

ACKNOWLEDGMENTS

SPECIAL ACKNOWLEDGMENT To our partner and friend, Cherie Wilkins, who contributed greatly to this book, not only writing parts of it but also giving an endless amount of inspiration, ideas, energy, and material. In particular, she wrote the Sara story, which provides the reader with a detailed walkthrough of the Rummler Process Methodology. Bravo, and deepest gratitude.

ACKNOWLEDGMENTS For contributing to the concepts and methodology Mark Munley Jaime Hermann Klaus Wittkuhn For providing opportunities to develop the ideas in their organizations Steve Hassenfelt, for whole enterprise PPMS design Richard King and Bert Kerstetter, for management system design and application of RPM to custom application development José Luis Luna, Homero Reséndez, and the many talented members of the Processes and IT department, for business process framework design and integration of process and technology change

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Steven Teal, Stacey Rachilla, Susan Erwin, Trevor Sparrow, and Ruth Henderson, for value creation portfolio management T. J. Elliott and Willa Thomas, for process management and contributing sub-processes Yvette Montagne and Rick Wills, for management system design Mark Munley, for management system design in a service-based industry Catherine Plowman and Oren Hester, for application to a shared service environment Kerry Sharp, for business process architecture design and technology/process integration Joyce Wells, for whole business redesign For helping in the writing of this book Dale Brethower T. J. Elliott Kregg Hale Paul Harmon Lorena Lanese Pat Murphy Fred Nickols Chris Ramias Klaus Wittkuhn

SPECIAL THANKS To Paul Harmon, for writing the Foreword To Leslie Stephen, for expert editing To Matt Davis and Lindsay Morton, for leading us through publication

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Acknowledgments

ABOUT THE AUTHORS

GEARY A. RUMMLER Dr. Geary A. Rummler was the founding partner of the Performance Design Lab (PDL), where he was continuing his lifelong work on organizational performance improvement in complex systems. He died on October 29, 2008. At the time of his death, Geary was working with his partners on two books. One was this book; the other addresses management and focuses on the design and operations of an effective management system from a process perspective. Prior to founding the Performance Design Lab, Geary was the founding partner of the Rummler-Brache Group, an organization that became a leader in the business process improvement and management business in the 1980s and 1990s. Prior to that, Geary was president of the Kepner-Tregoe Strategy Group, specialists in strategic decision making; cofounder (with Thomas F. Gilbert) and president of Praxis Corporation, an innovator in the analysis and improvement of human performance; cofounder (with George S. Odiorne) and director of the University of Michigan’s Center for Programmed Learning for Business. Geary was a pioneer in the application of instructional and performance technologies to organizations and brought this experience to the issue of organization effectiveness. His clients in the private sector included the sales, service, and manufacturing functions of the aircraft, automobile, steel, food, rubber, office equipment, pharmaceutical, telecommunications, chemical, and petroleum industries as well as the retail banking and airline industries. He also worked with such federal agencies as IRS, SSA, HUD, GAO, and DOT. Geary’s research and consulting took him to Europe, Japan, Korea, Malaysia, China, and Mexico. In addition to consulting, teaching, and presenting at conferences, Geary published a steady stream of articles and a variety of books ranging from labor relations to the development of instructional systems and his articles appeared in numerous professional and management journals and handbooks. In 1988, he coauthored Training and Development: A Guide

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for Professionals, with George S. Odiorne. In 1990, he coauthored Improving Performance: How to Manage the White Space on the Organization Chart, with Alan P. Brache. Geary received his MBA and PhD from the University of Michigan and served as: • The national president of the International Society for Performance Improvement (ISPI) • A member of the board of directors of the American Society of Training and Development (ASTD) • A member of the editorial board of Training magazine Geary’s professional accomplishments include: • Induction into the Human Resource Development Hall of Fame in 1986 • The Distinguished Professional Achievement Award from ISPI in 1992 • The Enterprise Reengineering Excellence Award from Enterprise Reengineering magazine in 1996 • The Distinguished Contribution Award for Workplace Learning and Performance from ASTD in 1999 • The Lifetime Achievement Award from the Organization Behavior Management Network in 1999

ALAN J. RAMIAS Alan J. Ramias is a partner of the Performance Design Lab (PDL). He was employed by Motorola for ten years as an internal consultant on organizational performance. As a member of the team that founded Motorola University, he was the first person to introduce Geary Rummler’s pioneering concepts in process improvement and management to business units within Motorola. Alan advocated and led several of the first groundbreaking projects in process improvement that evolved to the invention of Six Sigma and Motorola’s winning of the first Malcolm Baldrige Award in 1988. After joining the Rummler-Brache Group (RBG) in 1991, Alan led major successful performance improvement engagements within Fortune 500 companies. His experience spanned several industries and the full spectrum of corporate functions and processes, such as strategic planning, manufacturing, product development, financial management, and supply chain. Major clients included Shell, Hewlett-Packard, 3M, Citibank, Motorola, Steelcase, Citgo, Hermann Miller, Louisiana-Pacific, and Bank One. After leading many high-profile projects, he became a partner and managing director of consulting services at RBG. He led development of much of RBG’s products and services, and was responsible for selecting, training, and mentoring RBG’s consultant teams. He joined PDL in 2005. Alan can be reached at [email protected].

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About the Authors

RICHARD A. RUMMLER Richard A. Rummler is a partner of the Performance Design Lab (PDL). He brings more than fifteen years of consulting experience in the analysis, design, and implementation of organization performance systems. He has worked with organizations in Asia, Europe, and North America to achieve improvements in organization performance. Rick’s consulting experience includes a wide range of interventions, including process improvement and reengineering, organization redesign, and measurement and management system design. These projects have addressed various business sub-systems, such as customer acquisition, manufacturing, product development, and customer service. Organizations that have benefited from Rick’s consultation and project leadership include ABB, Applied Materials, GE Plastics, and Sun Microsystems. An experienced presenter of the concepts and tools espoused by PDL, Rick has delivered training programs to manufacturing and service organizations as well as government agencies and the military. Organizations that have specifically requested his training delivery services include Citibank, DuPont, and Hewlett-Packard. Rick can be reached at [email protected].

About the Authors

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White Space Revisited

Introduction

T

his is the book that Geary Rummler had long been planning to publish. His 1990 book, Improving Performance: How to Manage the White Space on the Organization Chart, coauthored with Alan Brache, became a bible to thousands of process improvement/management believers scattered throughout the business world, academia, and government. Ever since then, at conferences, client meetings, and public gatherings, admirers would sidle up to him and ask, “When are you going to write the sequel to the ‘white space’ book?” That became the working title of the manuscript that went through years of slow development, the final result the book you hold in your hands. This book is considerably more than an updating of Improving Performance, however. For example, that book said relatively little about information technology. By contrast, this book says a lot about that subject, because the world has changed remarkably in the past quartercentury due in great part to the impact of information technology on organizations. And so as technology became more and more entwined with organizational performance and processes, Geary and his partners at the Performance Design Lab (PDL) went back to school, so to speak, to learn and understand the implications of this convergence of work processes and information systems and to ask how well this merger has been happening. Sadly, Geary did not live to see the publication of this book. He passed away suddenly on October 29, 2008, just as the final chapters were in development. But he was heavily involved in creating this book, in structuring it, and drafting large sections of it—and even more important, in crafting the ideas that propelled him from his earliest discoveries in process thinking back in the 1960s, ’70s and ’80s to his latest work with the clients of his most current

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company, the Performance Design Lab. What drew him onward was learning something and then sharing what he found out. Because, among the many characteristics of his uncommon personality, Geary was uncommonly generous with his intellectual output. And so you will see as you read these pages. This book amounts to a tribute to Geary, yes, but even more so, it’s an outpouring of what Geary and his colleagues continued to learn about process for the past twenty-five years. You can hear Geary in many of the passages, you can read some lines and you’ll recognize that he said exactly those words in some setting, to someone’s face, with that particular mix of wry insight and passionate conviction that he was known for. For example, a classic Geary observation about the rather troubled management of IT, “They [senior executives] need to pay at least the same amount of inattention to IT as they do to all the other functional areas.”

OUTLINE AND PURPOSE OF THIS BOOK This book is composed of three parts, which together provide a conceptual foundation, a thorough methodology, and a set of working tools for doing process work in a vastly significant way, and a series of observations about the practice of what is commonly called Business Process Management (BPM) that are meant to aid the process practitioner in being more effective. Part One: White Space Revisited Our purpose in this part of the book is to review the past, assess the current state, and pose a model for the future of what we can call the “process revolution” that today is BPM. First, we attempt a retrospective of the movement from our own vantage point as instigators of many of the concepts and tools in common use today. We identify and comment on the achievements of the “process revolution,” on its major milestones since the first work done at Motorola in the 1980s that triggered the revolution, and try to characterize what we think the “state of the state” is regarding this all-important concept in business thinking. We then move to an updating of the key concept of “white space” in organizations. We pose this new definition of the white-space problem as the pivotal one that continues to bedevil organizational performance because of a long-established fixation on resource management to the detriment of value creation. At the same time, we argue that this problem is, for process practitioners, still the richest opportunity for improvement, and one that has barely been touched. From there we pose our solution to the resource versus value dilemma by introducing and describing a concept and model called the Value Creation Hierarchy. We walk through each level of this model in detail, describing how it helps to define a business and its processes and why an understanding of the hierarchy is critical to organizational performance. Part Two: Designing or Improving the Value Machine In Part Two, we use the Value Creation Hierarchy as a foundation for retooling the process practitioner. We provide tools and methodology for doing work that we firmly believe will yield results far beyond standard current practice.

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White Space Revisited

We provide a rich toolkit for defining processes in organizations, on the scale that, in our view, the work should be taking place but often isn’t. We walk through this architecture of tools, giving examples of how and when to use them. We then address the challenging subject of process management, giving our definition of what it should be and how it can be effective while describing the many pitfalls and errant practices we see in companies. Then we walk through, in a highly detailed case study, the Rummler Process Methodology for doing process definition, improvement, and management work—the culmination of our collective experiences in the years since Improving Performance launched us and so many others on the path of process improvement. Part Three: Implications In Part Three we directly address the important relationship of information technology to process. Having worked in numerous IT shops, we share our observations on the nature of doing process work with this set of practitioners. Then we outline a set of changes in its role, principles, and work methods that we believe would greatly improve IT’s success and impact on organizational effectiveness, including the introduction of a model, roles, and process for identifying, funding, executing, and managing improvement efforts for better results. Finally, we address other audiences relevant to process work and identify important implications of the ideas in this book for those constituencies. We close by summarizing the intent and major points of this book.

WHO THIS BOOK WAS WRITTEN FOR When Improving Performance was first published in 1990, there were no people running around inside corporations calling themselves the “Process Excellence” Department, or “Chief Process Officer,” or “Process & Technology Specialist.” Now we can’t keep up with all the variations in titles of both jobs and functional areas that purport to do process work. Improving Performance was written for managers, and the book found its way into the hands of people who became what we call in these pages “process practitioners.” This book is primarily for you, the practitioner. Our intention is to share all that we have learned about process that we believe will help you be more effective and have a bigger impact in your organization. The other audience for whom this book is intended is, once again, managers and leaders of organizations that want to achieve greater, and lasting, results. For you, who are likely to play the role of sponsor or senior participants in some of the process work described herein, the details in this book may be alarmingly dense. But our purpose is to arm those people who help you do this kind of work inside your organization with all the tools and methods we can. Rely on them to explain. In addition, in 2010 we will publish a companion book especially for managers on the same topics covered in this book, but with a distinct slant toward your role as leaders.

Introduction

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PA RT O N E

White Space Revisited

CHAPTER ONE

The Silver Anniversary of Process

CIRCA 1985 In April 1985, we (Geary and Alan) were invited to make a presentation at the annual conference of the National Society of Performance & Instruction (NSPI)1 because somebody had told the society that we were doing some “experimental stuff ” at Motorola. At the time Geary was founding partner of the consulting company, the Rummler Group, and Alan was a training manager and internal consultant for the Semiconductor Products business groups in the Phoenix area. Over the course of about two years, we had developed a new improvement methodology, and in late 1984 we got a chance to apply it to a business unit that was suffering from some significant delivery, product quality, and coordination problems. They were losing business to competitors. We got the senior management team to sit down and assess their way of managing the work flow. Most important, this team was composed of heads of several different business groups who had been asked to create and support this line of business but who had never acted as a coherent management team. It was during one of those work sessions that Rummler first posited the notion that the job of the team was “managing the white spaces on the organization chart.” At the time we had no name for this new methodology. During the NSPI presentation we laughingly referred to it as “our thing,” like La Cosa Nostra, but we weren’t quite sure what we had—it had started as a training program, morphed into a kind of problem-solving approach, and ended as a management “team-building” intervention, for want of a better label. But while we had the methodology and tools worked out in a primitive way, we didn’t yet have any results to show. Two months later, that changed. In June 1985, we reconvened the original team, now headed by a new senior executive, to see if any good had come out of the effort. It turned out that cycle time had been cut from fourteen weeks to seven weeks in nine months. The business—addressing a vital new segment for the sector—had turned completely around, and now the competition was chasing them.

7

That was the beginning. We had invented and then evolved the first systematic process design, improvement, and management methodology. Yes, we recognize that many other pioneers made great contributions to the field of what is now “business process management” (BPM)—among them, Frederick Taylor and W. Edwards Deming—long before us. But their ideas were adopted mostly by manufacturing companies, and process meant the production process. It was not until the 1980s that the business process movement—meaning design, improvement, and management of all important processes inside organizations—took hold, and that, in our view, was the beginning of BPM. Our methodology was eventually employed in most of the major business units at Motorola, then was married to Motorola’s version of TQM and rolled out in the late 1980s as Six Sigma. By 1990, “our thing” had had a major impact on the transformation of Motorola from a company with quality problems to a world-class leader in innovation and continuous improvement. In 1990, A. William Wiggenhorn, founder of Motorola University and the man who had brought Rummler into Motorola, estimated that the impact of these improvement efforts came to $950 million in savings for what was a $10 billion company at the time. During our years there, revenues tripled.2 Along the way, we had both invented and proved the benefits of an improvement methodology that yielded tangible business results with often startling speed. By the late 1980s, the methodology was being endorsed by the CEO on down, and Geary, as a member of the Motorola Management Institute from 1984 to 1995, taught the key concepts and approach to a generation of senior to midlevel managers. Not that the path to success was always swift and smooth. At first we did not know how to describe this new approach to improvement nor how to educate clients on the importance of processes. The most receptive areas at first were in manufacturing, where TQM was practiced and the concept of process was familiar (although everyone meant the manufacturing process only, not the larger business processes); outside of manufacturing, the notion of process was entirely foreign. Gradually, though, we learned to articulate the benefits of a process view, and we gained adherents one by one. During that period, Motorola was the most fertile ground for this pioneering work, but there were other takers. Geary built out the methodology as he also did work with other large corporations, including Ford, GTE, Douglas Aircraft, GM, GE Plastics, Sherwin-Williams, Ryder Truck, Capital Holding Corporation, Hillenbrand Industries, Sematec, and VLSI. Characteristics of the Approach What made the methodology work so well? There were several characteristics of these early projects that we think made all the difference: 1. Our process improvement projects at Motorola were conducted directly with the senior executives of the business units where we operated. Instead of having intermediary teams of specialists and lower-level managers on “design teams,” the executives functioned as

8

White Space Revisited

both “process owners” and designers in what we called an Executive Process Improvement Project. That is one reason why results were often achieved so quickly. Instead of months of analysis, process modeling, and commitment building with midlevel executives and other stakeholders, the people with the power to make things happen were the ones who had designed the improvements and wanted them implemented post haste. There was little time needed to create consensus and seldom much resistance. These people had competitive pressures and were serious. (We note that when we went to other companies, we ended up creating design and steering teams because the Executive Process Improvement Project was a hard sell.) 2. The focus of the improvement projects was on critical business issues such as total customer satisfaction, value creation, and growth of the business. These were issues that executives cared most about and would put their energies into addressing. We didn’t do “process work” merely because it seemed like a good thing to do; we did it only in service of a burning business issue. 3. Because of the focus on critical business issues, the processes that we helped to redesign tended to be the core, value-adding processes that create and deliver products and services right to customers. We were not buried in “enabling processes,” although we often dealt with them in order to make them more effective in serving the core processes. Assumptions on Which We Built the Approach The process improvement methodology that started at Motorola went through innumerable upgrades throughout the 1980s and 1990s as we, with our clients, learned more and more about process design, discovered additional tools and techniques, and covered greater ground in the quest to make it a comprehensive approach for change. In the early years, for example, there was no material on implementation. We relied on our clients to install their redesigned processes, and many did so, but some stumbled hardest at the point when the design work was complete but the organization at large had not accepted it. We added an additional phase to deal with implementation and change management. There were, however, some basic assumptions about processes and organizations that were used in developing and applying the methodology, and they have proved to be true over the decades. 1. Organizations as Systems We believe that every organization, public or private, is a system of interdependent parts and is subject to systems logic. The concept of systems applies at any level of a given organization, whether it’s an entire enterprise existing within a larger, super-system of market, environmental, and competitive forces, or a business unit or even a single department, existing inside as a system within systems. Figure 1.1 is a diagram of any business organization sitting inside its super-system. The Silver Anniversary of Process

9

Figure 1.1 The Organization as a System Business Environment Geopolitical

Regulatory/Legal

Resources

Any Business Capital

Capital Market

Economy

Natural Environmental

Returns

Management System

Culture

Financial Stakeholders

Investments Human

Labor Market

Resources

Market Materials/

Suppliers

Equipment

Products/ Services

Technology Providers

Customers

Technology

Customer Orders, Requirements and Feedback

Competition

Products/Services

There are several corollaries to this assumption: • Every organization is a gigantic processing system, composed of inputs, outputs, and internal processes that transform the inputs into valued outputs. Therefore, every process exists as part of a network of interdependent processes, each playing a role to produce value, manage the production of value, or support that transformative work. This means, among other things, that a single process cannot be effectively redesigned without a clear understanding of the other processes to which it is connected and to the organizational system of which it is only a part. And often, in order to address the deficiencies of a given process, we had not only to understand the larger system in which it resided, but to make improvements in the larger system. • Every organization must be an adaptive system, continually monitoring the larger supersystem and making small and large adjustments to be successful or even to survive in the long run. The critical business issues that were addressed by our process improvement projects at Motorola and other companies were all traceable to something in the super-system

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White Space Revisited

and the need for adaptiveness. The issue might be customer dissatisfaction with delivery times, poor product quality, the need to grow a market segment—the critical business issues were always an expression of the company’s need to be more responsive to some changing condition or its own wish to change the competitive landscape. 2. Processes Are About Work Process work is all about defining and managing work. The notion of “process” has turned out to be the best way to articulate the work done in organizations, and that is why it has outlasted its days as a management fad and now is a generally accepted concept for understanding and designing organizations. 3. Three Levels of Performance In order to achieve sustained high performance, an organization has to plan, design, and manage performance at three levels: organization, process, and job. We focused on process improvement because we knew that processes (being all about the work) had the greatest leverage for change, yet they were the least understood, defined, or managed. But the implication of this assumption is that even though our process improvement work was aimed at the middle level, we well understood that process improvements had to be linked upward to organizational goals, plans, and structure, and downward to the daily activities performed by individual performers.

MILESTONES SINCE 1990 Since 1990, process has followed a trajectory that took us by surprise. In the 1980s, our heads were mostly down, doing this kind of work in a few companies because we saw the results yielded and we were personally convinced of the value. We didn’t realize that the time had come for an explosion of interest in process. In 1990, Geary Rummler and Alan Brache published Improving Performance: How to Manage the White Space on the Organization Chart.3 The three levels of performance and the negative effects of functional silos were guiding themes of the book, and much of what had been learned at Motorola was contained in the examples. The book took off immediately, and our business grew phenomenally overnight, because we had about the only thoroughly developed process improvement methodology available. We were invited into many different industries and built up our own knowledge of process very quickly in the early 1990s as major corporations, especially those looking for innovative solutions, discovered us. We were also discovered by competitors: other consulting companies began attending our public courses and then putting out their own offerings. Suddenly everyone was an expert in process. But generally it was an exciting and inventive period; many people realized the value of process thinking and began to explore the subject and contribute their own ideas. We were adding people to the staff from many different functional disciplines, because we were finding The Silver Anniversary of Process

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out that the arena of process is multidisciplinary, and that people from areas such as Finance, IT, Marketing, and Sales had as much to contribute to process improvement as the manufacturing and engineering folks we were used to working with. And so gradually, “process” evolved into “business process,” and “process improvement” expanded to include ideas about “process management.” Reengineering In 1993, Michael Hammer and James Champy published Reengineering the Corporation, and it hit the business world like a thunderclap.4 Boosted by great attention in business magazines, reengineering became an overnight sensation; the world of process would be drastically affected. For us, the early effects were mostly positive. We got a great deal of business from companies looking for “reengineering” help and knowing only that process had something to do with it. We had a reputation for providing solid methodology. We also got a lot of business from Hammer’s dictate that one should simply rip up the current organization and start with a clean sheet. We were sought out by clients who had tried the clean-sheet approach and had gotten into deep trouble as well as by skeptical organizations that wanted a more thoughtful methodology. In reaction, we developed an early model of “process maturity” and argued that one should always understand the condition of an existing “is” process before deciding how much surgery is required. The much greater—and worse—effect of the reengineering fad, however, was its eventual association with downsizing. Several prominent consulting firms began calling their work in cutting costs and headcount a “process improvement approach.” One was known for a “brown paper” exercise that appeared to be similar to some of our techniques of mapping business processes on large sheets of paper and analyzing them with design teams. The truth, though, was that we rarely used process improvement for cost cutting or headcount reduction. Far more often, the critical business issue with our clients was business growth. Unfortunately, everyone in the process business for a time was tarred with the brush of the downsizing movement, and the field went into a negative tailspin. Six Sigma In the late 1990s, Six Sigma surfaced as another trend related to process. After Motorola won the first Malcolm Baldrige Award in 1988 and began hosting huge numbers of benchmarking teams from other companies, the Six Sigma approach was adopted by such companies as Allied Signal and GE. It was a gradual expansion, because Six Sigma requires a daunting amount of discipline and investment and could not spread nearly as quickly as the concepts behind reengineering. Yet despite the obstacles to adoption, Six Sigma has evolved into perhaps the most widely accepted version of BPM practices of any available. A great many companies not involved in the process movement of the 1990s are now ardent Six Sigma practitioners. There are critics

12

White Space Revisited

of Six Sigma, of course—those who have published research showing a high rate of long-term business failure among Six Sigma companies and those who suspect that Six Sigma can lead to organizational ailments like rigidity and loss of creativity. But it is hard to deny how powerful and widespread has been the impact of Six Sigma, regardless of its potential drawbacks. We have thought it kind of a shame that the label of “Six Sigma” ever got attached to the methodology. Certainly, from the name, one would assume that it’s all about statistics, and while that is certainly part of the story, the approach to process improvement that was practiced in the mid-1980s at Motorola, as we described earlier, was on addressing critical business issues and getting results. But unfortunately, as practiced today in some organizations, Six Sigma doesn’t look a lot like the original version. For example, today one of the chief goals of some versions of Six Sigma is to choose and certify a cadre of Six Sigma “black belts” to organize and conduct multiple improvement projects. The emphasis is on getting a project and getting certified, which leads to keeping the scope of projects small (seldom if ever taking on a large, cross-functional core process) and creating projects unconnected from each other and not driven by a strategic focus. One of the single big projects we conducted in the 1980s would likely be chopped up into several small projects today, with diminished results. In addition, the practice of Six Sigma seems to have become a specialty and even a career choice. One supposedly has to be “black-belt” certified to do this work, which distances it from the people who perform the process or manage it. And the cloning of many black belts adds to that aura of needing a special class of people to do process improvement. Contrast that to the situation at Motorola. At one of the sites that Alan supported in the mid-1980s, there were three major business divisions plus five manufacturing organizations and two design engineering houses. The employees numbered about 5,000. They were supported by one statistician—who, by necessity, was an advisor, not a project leader. The improvement projects were performed by line people who were experts in their own processes. There are still organizations that approach Six Sigma in this fashion, but there are so many variations of Six Sigma today that it is hard to know what a company claiming to be a “Six Sigma organization” might be doing unless you can see them in practice. Process Management/Governance The concept of process management, or ownership, was described in Improving Performance as “someone is looking at and taking action to improve the performance of an entire cross-functional process.”5 Our notion was that process management is a senior management role, with a focus on addressing major “white space” issues. At Motorola the responsibility for process management was the same thing as responsibility for the performance of an entire business. In the early to mid-1990s, it was rare to encounter an organization that had implemented process management, and if one did, it tended to be in the form of a council of senior managers, abetted by improvement specialists, that assumed collective ownership of the core processes and would meet occasionally to prioritize improvement efforts. But the idea gradually The Silver Anniversary of Process

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spread, and today many companies have adopted their own brand of process management. But never did we imagine how the concept could be misinterpreted. We have been invited into some organizations that have appointed dozens of “process owners” for nearly every type of process, no matter how insignificant. The role is often assigned without any clear definition of the purpose or the responsibilities. In some companies, “process owners” are in reality staff employees who do process design and improvement efforts but are distant from the responsibilities of getting the work done. Inevitably, the concept either dies a quick but embarrassing death because nobody knows what to do, or it leads to turf battles between process owners and line managers over who is in charge of process performance (and performers). We had never envisioned process management as a shadow “governance” structure laid on top of the line organization. Instead we had seen it as viable only if assumed as an additional role by a senior manager with existing responsibilities relevant to the process ownership role (for example, he or she was the manager of one of the key functional areas participating in the process). And we saw process ownership as necessary for only the big, core processes that deliver value to customers, but not for all the enabling processes and sub-processes. The idea of process management still has value—and in fact, we think it is the very key to effective performance of an enterprise—but it needs to be cleaned up, redefined, and separated from all of the bad interpretations applied to it. Process Documentation/Repositories In a similar vein, the idea of mapping a business process has evolved into a cottage industry. There is no denying the considerable value to an organization of defining its processes, documenting them in some consistent fashion, and making the documents available for a variety of uses, such as training, measurement and management, and improvement. But we have run into organizations that have spent all of their efforts in documentation alone and have turned it into such a specialty (especially by applying hard-to-use kinds of modeling software) that nobody except the documenters understands or uses the process documents. In one organization we visited, a special team of highly skilled engineers had devoted years of effort in creating some 5,000 pages of process documentation in hopes of achieving a certain level in the CMMI process maturity scale. But in answer to the question, “Have you ever done any process improvement?” the answer was no—too busy creating the documentation. Furthermore, it turned out that the line departments weren’t using those documents either; the documents were too cumbersome to access, read, or keep up to date. So the process maps did not represent the work at all. In addition, we have seen a great deal of effort and money spent in trying to put this documentation into repositories so that the documentation can be accessed, referenced, and updated by others. Often these efforts engaged knowledge management professionals who brought techniques for cataloging and controlling the documentation. But despite these wellintentioned efforts we have seen little evidence of effective strategies to ensure the quality of documentation, encourage use by others, and identify and incorporate changes.

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White Space Revisited

Advances in repository software capabilities have helped bring a much-needed hierarchical structuring to the process documentation. But organizing the documentation this way doesn’t resolve one of the greatest fundamental challenges: the lower the level of documentation, the shorter the shelf life and the greater the maintenance requirements. So what we often find in organizations is a library of historical process documentation that almost always requires validation before it can be trusted as a statement of what is truly the current practice and is typically only referenced by a handful of “users.” What has tended to fuel this fixation on process documentation are the requirements of programs like ISO 9001 and its descendents, and CMMI and the burgeoning varieties of process maturity models. And to make this tendency worse, the powerful process modeling tools now available can make it relatively easy for people to create great mounds of process documentation—for some reason or other. Don’t misunderstand—we think you should define your processes, which means capturing the current practices and then designing the “should” version—but that means doing documentation with a purpose, and the purpose should shape what and how you document and should also dictate some requirements for usefulness. Sarbanes-Oxley Passage of the Sarbanes-Oxley Act in 2002 spurred a renewed interest in process long after the negative effects of reengineering and downsizing seemed for many companies to have taken a fatal toll on the whole concept. But “process” had never really disappeared, and when SarbanesOxley was suddenly mandated—especially with its Section 404 requirement that CEOs and CFOs must certify that they have an effective system of internal controls over financial reporting and must report on the effectiveness of those controls at the close of each fiscal year— process mapping and management came roaring back. Many companies recognized that the best way to find out whether they had controls in place, and to design them in if they were lacking, was to employ a process approach. Admittedly, much of the effort expended was in simply mapping processes as they existed, with very little improvement and very little questioning of business need, but Sarbanes-Oxley did serve to bring back an interest in process in companies where it had languished. And in companies where process thinking had never taken hold before, Sarbanes-Oxley was that critical business issue that generated an interest. Automation The biggest driver for process these days is the impact of information technology on process. Automation has always been there, of course, and has been one of the standard options for streamlining or improving a business process. Technology has generally been viewed as an “enabler” of performance, helping the human performer do the work more efficiently. But the acceleration of new developments in technology since the rise of the Internet in the mid1990s is turning the integration of technology with business processes into a major strategic The Silver Anniversary of Process

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issue. Many companies today are increasingly relying on technology to provide their avenues to market, their distribution system, their supply management, their creative edge. And today some processes are so automated that it probably is inaccurate to think of technology as merely an enabler; it has become a performer of the work itself, sometimes alone and sometimes in support of human performers. There is hardly a process to be found that is not to some degree entwined with technology. This development has pushed the CIO into a role of strategic thinker and collaborator with the CEO on how to engineer a successful enterprise. At lower levels, it has caused many IT organizations to become aware of their relationship to process, and, in some cases, to become the stewards of “process excellence” in their organizations. There are some specific historical reasons why technology has become so prominent in the process space. We discuss a few of them next. ERP Systems and Y2K In the 1990s, ERP (enterprise resource planning) systems became widely popular, solving some vexing corporate problems while causing new ones. It made great sense for many companies to adopt a rigid, standardized set of software to execute their myriad everyday administrative processes; however, that same standardization was not such a hot idea when applied to the important processes in which competitive advantage potentially lurked—and who could know what processes were tomorrow’s competitive edge? But ERP systems locked you into one way of performing a process—reversing the conventional wisdom that an organization should first design its business processes and then automate them. Nonetheless, the widespread adoption of ERP systems hastened the dependence of business processes on software systems. The other factor to strengthen the process–software tie was Y2K, the supposed threat of catastrophic computer system failure at the end of the twentieth century that caused a mad scramble of organizations large and small to build in preventive measures to protect their computer systems from crashing. (Must have worked.) And it did make processes and systems that much more interdependent. Workflow Modeling/BPMS Workflow modeling tools have been available since roughly the 1980s, but it was not until the mid-1990s that the offerings became robust enough for business to pay attention. It has always been a dream of process designers to take all those sticky notes on rolls of paper and turn them into something easily navigated, changed, tested, and updated. Some of the most prolific users of workflow models were Business Analysts, who used them to identify requirements as part of systems development efforts. This application of the toolset typically involved modeling the work that surrounded the system, a very worthy objective. But the resulting documentation was often referred to or confused with process models simply because the tools and the formats were the same. The assumption was that because we can document a work activity using workflow modeling tools, it must be a process.

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White Space Revisited

Over time, an entire industry grew up to provide workflow modeling tools, and organizations of providers and users have been formed to agree on rules and conventions for their design. This has led to an increasingly robust but complex range of functionality and conventions that has resulted in a fundamental schism between the tool experts and power users who can build and interpret the models and the people who perform and manage the work (and ideally the users and maintainers of the models). This schism is a large barrier to institutionalizing the use of workflow models in organizations. Today’s BPMS offerings do all kinds of valuable and attractive things; the issues today have to do with too much functionality, too much complexity, more bells and whistles than anyone really needs, and the basics—of creating, changing, and saving process maps—still too difficult. But progress continues, and we are hopeful that the usability of workflow models will improve.

GENERAL RESULTS So where has the process/process management movement gotten? Despite some real results here and there, and despite our own role as practitioners, preachers, and believers, we think the movement has not reached its real potential. When you look critically at the current practice of process, you see challenges abound. IT/BPM Challenges IT has somewhat taken on (not always by choice) a leadership role in the process movement. But it is facing major obstacles: • The approach that IT is taking to development of technology solutions is largely functionally focused. They respond to requests from Operations or Finance or Sales or Engineering, and they do their best to deliver functionality to meet the specific needs of the requesting organization. The problem is that the many different solutions don’t add up to a coherent system of enabling technologies, but just a hodgepodge of applications and databases that become ever more complex and prone to breakdowns. Even so-called enterprise (ERP) solutions are functionally focused. • There continues to be a fixation with bringing in the latest technology that fascinates the technologists, rather than starting with the organization’s strategies and then figuring out how technology can enhance or improve the organization’s ability to accomplish work and deliver results. • Many IT organizations are not aligned effectively with the businesses they are supposed to be serving. For example, the role of Business Analysts is to play an interpretative role, bringing the requirements of business to the IT development specialists and helping them build solutions that meet business needs. Instead, some Business Analysts have been co-opted by the IT organization’s own internal goals and practices, and they spend most of their time negotiating with business in an endless cycle of requirements rewrites. The Silver Anniversary of Process

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Process Improvement Wars Another issue preventing process and process management from reaching its potential is the battle for control of this discipline. We know of many instances of staff organizations fighting over leadership of process improvement. The reasons for these conflicts vary, but here are a few examples: • A Fortune 50 multinational firm, with fifteen strategic business units and eighty additional business units, in operation for more than 100 years, had accumulated ten distinct internal consulting groups, including: 

Supply Chain Management



PACE (an accelerated new product development and introduction process)



Six Sigma



Process Reengineering



Organization Effectiveness (OE)



Statistical Process Control



Strategy Development

In the beginning, these groups, housed in various headquarters staff functions, all worked independently and competed with each other for project work from the line organizations. It was not uncommon for three or four of these consulting groups to be simultaneously pitching their particular expertise to the same business unit. Then, after numerous complaints from line managers about the redundancy and confusion of all these consulting units, they were centralized under one corporate executive. This individual, however, uncertain how to proceed, made no effort to build a conceptual framework that would have provided a logic or rationale for distinguishing among the units, integrating any of their offerings, or consolidating them. As a result, nothing changed. The units remained selfsupporting to some degree and continued to compete with each other. In fact, they got worse. Shortly after the reorganization, a big blow-up occurred when four units independently submitted proposals to help one business unit address an operational issue. Its frustrated general manager called representatives of all four proposing units to his office and told them he wanted nothing more to do with them until they returned with an integrated proposal. His rationale was that it wasn’t his job to figure out the best solution to his challenge—that is what they were paid to do. But this kind of situation continued to happen again and again, until the budget of this centralized staff group became a highly visible target and the entire group was disbanded. A few survivors found work in specific strategic business units, but the company as a whole was robbed of the expertise that it needed and had been paying for but not getting.

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White Space Revisited

• A large financial services company undertook a major effort to upgrade the company’s entire technology, with the goals of eliminating dated and overlapping systems and integrating tools and databases for better employee performance. A prominent technology vendor was hired, and a program office was set up to oversee the initiative. However, inside Operations, work was already underway to meet Sarbanes-Oxley requirements and improve processes by mapping core processes. The IT vendor first got in the way of this effort by staffing up several internal teams and insisting that many of the business people involved in the Sarbanes-Oxley effort switch their attention to the technology transformation. Things were made worse when the IT vendor disparaged the tools being used to capture processes (that is, typical cross-functional process maps) and instead insisted on using its own IT-centric toolkit. It was a process notation war that went on for months and was settled only when the first technology release was so abysmal that the vendor was unceremoniously booted out and the business took over the transformation effort, blending it with the process improvement initiative. But meanwhile, the notion of “process” took a beating. Big Crashes and Burns on the “Process-Managed/Process-Centered” Highway As a long-term objective for a company, becoming “process centered” (or “process managed” or “process driven”) is a laudable aim. We’re not always sure what a given company might mean by the term, but our interpretation of becoming a process-managed or -centered organization means recognizing and treating processes as one of the most important components of the organization; processes are the means by which work is accomplished and value is created—in other words, processes are essential to any organization’s purpose. So becoming process managed means carefully defining, designing, supporting, and managing one’s processes. A fair number of companies we know have decided to become a process-managed/processcentered organization. What we haven’t seen is much success in getting there. To wit: • A consumer services organization created a large “process excellence” department, hiring dozens of people with strong experience in process improvement, Six Sigma, reengineering, and the like, and attending this activity with great hoopla and promises of good things to come. To get them all “on the same page,” the new folks were sent individually or in small groups to a very well-known provider of seminars and certification in all things process. This action took place over months, at great expense. But meanwhile inside the new organization was utter chaos, with no coherent plan of action, no methodology for identifying clients or issues or areas of focus. So after months of embarrassing floundering around, the department was dismantled and its members disbursed to other areas or sent out the door. Result? The less said about that, the better. Business Process Architecture Is a Good Idea, but . . . Essential to becoming process managed is to define the organization’s business process architecture. A business process architecture is a clear picture of an organization’s business The Silver Anniversary of Process

19

processes; their purposes and relationships in producing value; their link upward to organizational strategy, objectives, and requirements; and their link downward to human performers and supporting technologies. In our early years of doing process improvement, when we focused largely on single crossfunctional processes, we created pictures we called “process relationship maps” that would identify the process targeted for improvement along with its upstream and downstream processes, its enabling processes, and the management processes that provide guidance. So we always had a kind of “architecture” view, but in recent years we have come to recognize how important this view of the organization is. One cannot hope to transform a complex organization by addressing one process at a time (the exception being a small company that may have a single product or service and therefore a single core process that constitutes the guts of the organization). One has to comprehend the “organization as a system,” which means understanding all of its processes; effective lasting improvement may require redesigning much or all of the process architecture. The ideal scale of this work has increased in our own practice, and we believe that improvement on this larger scale is the preventive to Hammer’s message that “70% of reengineering projects fail.” However, this is the current reality: • There is very little evidence that companies have defined their business process architecture, and few see why it’s of value to do so. This doesn’t mean they are not doing process work; they are often madly generating process maps and doing Six Sigma projects, but they have not cast a net on all this activity with a picture of the business architecture— redesigning parts of the elephant without seeing the elephant. • Where a business process architecture of sorts is being created, it is being done by the Enterprise Architecture function, so ipso facto it is a technology-oriented view, not a business view, and it is owned by IT, not the business leadership, so the value of such a picture is hard to grasp for anyone other than an Enterprise Architecture type.

BPM, but . . . Somewhere along the way, process modeling software vendors adopted the term “business process management” for their wares, and they have invested so much in the term that a lot of people hearing “BPM” today automatically assume you are talking about the software. But it is hard for us to see the M in BPM. Yes, today’s BPM suites offer some amount of functionality to amass and report performance data, but they offer little of anything that could be called process management. The management work of planning and designing performance, providing and managing the resources and support to performers in the process, diagnosing variances and making critical adjustments, deciding whether a process should be improved, discarded, or replaced—all these chores can be aided with good tools that help

20

White Space Revisited

make data readily available and easy to understand. But it is a major mistake to confuse the assistance with the management. In a similar way, the ability to simulate process performance can be a very helpful aid in understanding how a process design will work once implemented, but the simulation capability does not by itself guarantee you a good process design—much less one that might be highly innovative and change the rules of a competitive game. Technology cannot substitute for human inventiveness and human intelligence applied to business problems—not yet, anyway, and probably not in our lifetime. BPM would be better off calling itself what it is: business process technology. In this book, we try to be very clear about what we view as process management.

CLOSING POINTS Process has most certainly evolved over twenty-five years, with great progress and impact in some respects but also with bumps along the way. Despite our admittedly dim view of some of the goings-on in the process world these days, we remain convinced that 1. Process/process thinking/process design/process management are essential to all organizations. We believe that, indeed, process is the most valuable insight into the nature of work and organizations in the past hundred years. 2. Process is here to stay, having outlasted its period of faddism and its many misapplications. It is now imbedded in business school curriculums as something every business professional should know. It has proven its worth. 3. There is, however, a better way to go about this work, a way that circles back to our original assumptions of the organization as a system, of processes being about the work, and the three levels of performance—but updated with numerous insights since Improving Performance was published. 4. What Motorola—and other practitioners that achieved large-scale successes with process improvement—were focused on was value creation. In hindsight we have realized that they understood that the business is fundamentally about serving customers in the most effective possible way with superior products and services, and that you cannot achieve that best-in-class service through downsizing, cost reduction, or other techniques that merely delay the inevitable. The key questions for any process practitioner are (1) Where are you right now in your search for process excellence, and (2) where are you headed? We think that even if right now you may be buried down at the sub-process level where you may have little impact on business results, there is a pathway you can follow to move up the “process evolutionary path,” if

The Silver Anniversary of Process

21

Table 1.1 The Scope and Range of Process Work

Process Scope

Definition/ Documentation

Process Design

Process Redesign/ Improvement

Process Management System Design

Enterprise/Business Model Value Creation System Processing System Process Sub-Process/ Task/Sub-Process

you will. That path is illustrated in Table 1.1, which moves up in scale from sub-process at the bottom to single process to multiple processes to the whole “value creation architecture” (a term we explain in Chapter Two) of a business to the entire business design. For the moment, the cells in this matrix are blank, but we will fill them in throughout the remainder of this book as we explain the approach we think can help you maximize the power of process in your own organization.

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White Space Revisited

CHAPTER TWO

Process in a Value Perspective

I

n Chapter One, we asserted that despite a vast broadening of the language, concepts, and tools of “process,” progress in transforming organizations into well-designed and managed institutions is still slow. We further argued that much of the momentum of the work of the 1980s that established process as a legitimate business concept has been followed by a trail of misfires and misapplications of potentially powerful techniques and tools. In our view, the root cause of this lack of progress in process is that most people (practitioners and managers alike) still do not recognize and understand that organizations are systems and, consequently, don’t realize the implications for how organizations should be planned, designed, and managed, which in turn means the value of process concepts continues to be misconstrued and misapplied. Despite lip service to “systems thinking,” many practitioners of process improvement management don’t get—in a practical, applied sense—that processes are part of a larger organizational system and therefore cannot be tinkered with in isolation. These individuals don’t see the larger system context of particular processes. This myopia is shared by managers and employees, many of whom are familiar enough with notions of process to talk about “their process” but don’t see the connections of that process to a larger architecture of processes that must be designed and managed. As a natural course of being in a particular part of a given organization and possessed of a particular set of skills, they are fundamentally grounded in their own discipline or functional area (Engineering, Sales, Manufacturing, Customer Service, Product Development, Finance, HR, and so on) and tend not to look beyond their department boundaries. Nor are they encouraged and enabled to do so. And, if anything, technology has abetted their functional myopia. Alas, white space abideth.

23

The correction to this myopia is to return to the foundations of process work, to our underlying assumptions, and to how they have changed and expanded as we, and our clients, have learned more and more about organizations as systems.

BASIC PREMISE: THE ORGANIZATION AS A SYSTEM Our starting point for understanding and characterizing any organization today is still to try to understand it as a system. But a system to do what? Answering that question is a helpful way of diagnosing what is happening in an organization and evaluating what needs to change in order to improve. All organizations—public or private, large or small—exist to provide value. For all the activities and complexities of any organization, they must fundamentally produce something of value to someone other than themselves, or they will not be in business long. In short, a business is a system that exists to provide value to customers and financial stakeholders. A business must meet four key requirements to provide value to their constituents: 1. Understanding the value to be delivered to its dual constituency 2. Designing and maintaining a value-adding work system that has been engineered and optimized to produce the valued product/service 3. Resources to perform that work, which starts with capital and expense dollars that are converted into people, technology, equipment, facilities, and materials 4. Management of the integration of resources and the work system to produce the desired value Figure 2.1 represents the ideal relationship among these four elements. What happens in many, if not most, businesses today is depicted in Figure 2.2. This is a picture of a system that is woefully out of balance. Following is a summary of what has happened to the four requirements in many organizations. 1. Understanding the Value to Be Delivered to Its Dual Constituency Many companies fail to manage a balance between the value delivered to customers and that delivered to financial stakeholders. Increasingly there is a short-term emphasis on delivering value to financial stakeholders (return on investment) versus value to customers. What seems to be lost is the inescapable fact that the return to financial stakeholders is ultimately dependent on the value (in the form of valued products/services) delivered to the customer. This shift away from delivery of value drives a corresponding shift in priorities within the organization: To satisfy the continual demand for short-term financial results, control of resources has become the primary internal priority.

24

White Space Revisited

Figure 2.1 The Four Key Requirements of a Business

Any Business Resources Management

$

$

$$

$

$

Work System

Financial Stakeholders

Valued Products/Services

Customer

Figure 2.2 The Resources Fixation

Any Business Resources Management

$

$$ $ $

$ $

$

$ $

Work System

$

Financial Stakeholders

$ Valued Products/Services

Customer

2. Designing and Maintaining a Value-Adding Work System to Produce the Valued Products/Services A major reason the resource element is prominent in business is that, by contrast, the work and work system are virtually invisible to the human eye. With the exception of a few engineering drawings in a manufacturing or process operation, there is no agreed-upon end-to-end Process in a Value Perspective

25

articulation of the value-adding work required to produce a valued product or service, from product/service inception, through marketing and selling, to delivery and support. Even when such a depiction may exist, it tends not to be a tool used by management to understand and guide the organization. Process understanding may reside at lower levels of the organization but not at the top. Further, what little definition of the work and work system has been done tends to be confined to individual functional resource “buckets.” The work specification is under the control of each function or department, constrained by their resources and their particular parochial view of the business. These costly work activities quickly evolve within the siloed resource buckets into what many organizational observers then call “culture,” which is really many little individual, self-absorbed, rigidified cultures whose goal becomes self-preservation. In many cases these insulate functional resource buckets are further reinforced by legacy technology systems and applications provided by an ever-obliging IT organization. Thus, the IT organization reinforces a silo view of work, organizing itself to mirror the resource buckets on the organization chart. Then given its own fragmented understanding of the business, IT is unable to muster up a useful (to the business) end-to-end articulation of the value-adding work required to deliver a valued product or service. This myopia becomes particularly obvious when IT is tasked to create or install enterprise-wide systems (such as ERP). Its approach is to tackle the project functional area by functional area, the only approach it knows. 3. Resources to Perform That Work Internally, the most dominant element in most organizations today has become resources, for several reasons. One major reason we have already stated: the priority given the return to financial stakeholders. Resources is where the money is. This emphasis on value to financial stakeholders exacerbates a fundamental misunderstanding of cause and effect between our four requirements of a business shown in Figure 2.1. Many organizations behave as if there is a direct connection between resource management and returns to financial stakeholders. Perhaps there is in the short term. But the longer-term reality is this: when things are working as they should inside an organization, resources make their contributions within value-creating work systems that provide valued products and services to customers, which in turn results in earnings to be distributed to financial stakeholders. There is no viable shortcut to results by managing resources. A second reason is the daily visibility of resources in any organization. The organization chart of a business is in most cases a high-level representation of the allocation of critical resources across the organization. Each function shown on the organization chart is a resource bucket, backed by a corresponding capital and expense budget. The visibility of the budget structure is understandable given that dollars are the lifeblood of a business, and in any wellrun enterprise every nickel must be accounted for. The dollars are distributed at the beginning of the year and their utilization tracked and accounted for publicly every month. Heads roll if resource utilization doesn’t tally with resource allocation at the end of the year.

26

White Space Revisited

A third reason is resource ownership represents status and power for executives and managers at every level of the organization. The bigger the resource bucket controlled, the greater the presumed value of the executive. And yes, there have been experiments in recent years with virtual teams and lateral promotions and managers without staffs, but clear away the rhetoric and we see that the power games regarding headcount have not changed. 4. Management of the Integration of Resources and the Work System to Produce the Desired Value The relentless emphasis on resource management is predictable, given that resource utilization is critical but also relatively easy to monitor. (Who can’t compare “actual versus budget”?) As ready evidence of this bias, note the annual planning and budgeting ritual, which easily extends over four to six months of a year and consumes a quarter or more of management time annually. Add to this the time spent monthly, quarterly, and annually at every level of the organization, examining “actual versus budget” and pursuing endless initiatives to close any gaps between the two, and you easily come up with 85% of management time focused on resource management. Add to that the untold hours of effort by numerous staff organizations assigned to crank out mountains of analyses and PowerPoint charts designed to protect the backsides of various and sundry managers, and you have organizations that barely get anything useful accomplished. Meanwhile, the little attention paid to work and work systems is carried out within the functions and usually is focused on how to get more work with fewer resources. And all the while, the truth is that resources can be wisely managed only in the context of the value-adding work required to deliver valued products and services. But how do we make this happen? How do we get “resources” back in balance with “work”? Resource management is front of mind for every executive or manager in any business. (“Who’s paying for that? It sure as hell isn’t coming out of my budget!”) In contrast, the valueadding work required to keep the enterprise in business is invisible—buried in essentially independent functional resource buckets. Like Rodney Dangerfield, “work” gets no respect! A starting point for rebalancing the management of work and resources is to think differently about the contribution of work. . . .

THE VALUE MACHINE Let’s reorient ourselves to our picture of the ideal components of a business as shown in Figure 2.3. In that depiction, we start with the assertion that a business is fundamentally a value-producing machine (a Value Machine, for short) that exists to produce valued products and services to customers (1a) and a return to financial stakeholders (1b). When we look inside the machine, we see two fundamental components that must be managed in concert to produce the desired results: • The end-to-end Value Creation System (2) that effectively and efficiently converts customer needs and desires into products and services that those customers value and will pay for. In this context, we are no longer viewing work as resource-consuming activities but Process in a Value Perspective

27

Figure 2.3 The Value Machine

Any Business 3

Resources

1b

$$

$ Management

4 $

$

Value Creation System

Financial Stakeholders

$

2

1a Valued Products/Services

Customer

rather as a carefully designed set of value-adding outputs leading to valued products and services. This system of value-adding work is the backbone of the business. The business is only as good as this value creation system. • The resources (3) necessary to fuel the value creation system. The primary tasks of management (4) are to properly allocate and manage those scarce resources across the value creation system so as to effectively and efficiently produce the desired products and services. Now we see that there are really two critical dimensions to business performance that must be managed in concert: 1. The value creation dimension (the system of value-adding work that delivers valued products and services to customers) 2. The resource dimension (the scarce resources required to perform the value-adding work of the enterprise) Up to this point in modern management the world over, the management effort has been skewed in the direction of the resource dimension, with inconsistent results. There is ample evidence of this imbalance between resources and value creation, including: • Endless cycles of reorganization that fail to work because the only thing being reorganized is the names on the functional resource buckets. There is seldom any change in the end-to-end

28

White Space Revisited

value-adding work required to deliver the end product or service. In most cases, functional sub-optimization of the end-to-end work system continues unabated. • Failed product/service launches because key functions can’t or don’t participate in the design, development, and proper preparation of the organization for the launch, because of their functional resource constraints and inward focus on their own activities. • Customer outrage at companies that try to keep costs in line by skimping on resources (think of poorly staffed help desks and technical support) instead of properly delivering value. • Downsizing death spirals as companies try to resource-manage themselves back to profitability. The resulting chaos in the value creation dimension is ignored by everyone but the customer. It is time to begin managing both the value creation dimension and the resource dimension. Business performance most definitely is not a case of resources versus value. The only way a business is going to survive in the future is the wise allocation of critical, scarce resources in the context of the organization’s unique value creation system. However, we are quick to acknowledge that this task is easier said than done. Forces driving an emphasis on resources are many, including: • As acknowledged earlier, the functional structure of organizations, which is legitimate and necessary (As we describe later, there are workable ways to accommodate both resources and value within a functional structure.) • The formal accounting, budgeting, and planning systems • The desire for some accountability, which is easier to approximate with a resource bucket structure And there have been many efforts over time to bring back some balance between value and resources. One such effort was the short-lived Activity Based Costing movement, born of the need to link resources to specific activity. Because it was a bolt-on, shadow management system, it quickly succumbed to the established accounting system. In something of a crude effort not to lose sight of the value creation system of an individual business, Gore, Inc., maker of GoreTex, among other products, has famously declared that they will not have a business of more than 300 employees. And in many businesses, the CEO calls out a half-dozen highlevel initiatives for the year, in an attempt to impose some general value objectives on the already tightly resource-constrained organization. But to date, these and other approaches have not made a dent in the imbalance.

THE VALUE CREATION PERSPECTIVE In the present context of work systems, the notion of process is frequently trivialized as “process improvement”—just another tool for cost reduction and productivity improvement. Process in a Value Perspective

29

But the need to recognize and manage the value creation system (along with resources) puts process in a different light, in a value perspective. For a business to achieve systematic, sustainable value creation, two things are required: 1. A sound value creation system—an infrastructure for delivering value 2. Management of the value creation system Process is at the heart of both these requirements. Regarding infrastructure, a sound value creation system is nothing more than an effective and efficient network of value-producing processes. Thus process is the fundamental building block of a value creation system—a LEGO assembly of processes. With this understanding, we no longer look at processes as just a sequence of work activities to be modeled, improved, and managed in isolation. We see every process as a tightly woven component of a larger value creation architecture: a picture of the total value creation system. Every modeling, improvement, or management effort of a process must be seen in the context of the total value creation system of a business—as a contribution to that total value creation system. Before a value creation system can be managed and improved, it must be articulated, made visible. Because process is the fundamental building block of the value creation system, process is the tool we use to systematically articulate the previously unarticulated, invisible value creation system of a business. Thus the strategic contribution of process is to make the invisible visible and the unmanageable manageable.

OVERVIEW OF THE VALUE CREATION HIERARCHY Historically, the organization chart has been the de facto organizing template for business. We argue that what is needed is a different view, against which proper resource allocation decisions can be made. Figure 2.4 is just that: a top-to-bottom framework for structuring the value-adding work in a business. We call it the Value Creation Hierarchy, or VCH. As you can see from Figure 2.4, there are four levels of decomposition of the work carried out by the businesses making up an enterprise (the whole enterprise being at Level 1). And as you will see shortly, the VCH is more than just a documenting or decomposition scheme— every level is a work system structure and represents important decisions about work design. Following is a quick overview of the five levels of the Value Creation Hierarchy represented in Figure 2.4. The VCH is explained in detail in Chapter Three. Level 1: Enterprise/Business Model The Value Creation Hierarchy sees any enterprise or business organization as a system, operating as part of a super-system that consists of markets, competition, resources, and the general business environment.

30

White Space Revisited

Level 2 Value Creation System

Value Chain

Level 1 Enterprise/ Business

Labor Market

Technology Providers

Suppliers

Human

Capital Market

Businesses

Any Enterprise

Regulatory/Legal

Product/Service Launched

Resources

Technology

Equipment

Materials/

Resources

Capital

Resources

Geopolitical

Product/Service Sold

Competition

Customers

Markets

Product/Service Delivered

Product/Service

Products/Services

Services

Products/

Culture

Financial Stakeholders

Investments

Returns

Natural Environment

Order for Product/Service

Value Creation System

Management System

Management System

Economy

Business Environment

Figure 2.4 Value Creation Hierarchy

Order Entered

• Customer Order Spec Reviewed • Customer Order Spec Issues Clarified • Complexity Assessed • Required Specialities Noted • Engineering Hours Estimated

Engineering Estimated

Product/Service Portfolio Managed

Launched Product/Service Developed and Launched

Level 5+ Sub-Process/Task/Sub-Task

Level 4 Process

Level 3 Processing Sub-Systems Customer Relationship Maintained

Job Specification Packet Developed

Job Designed

Order Obtained

Programs and Applications

• Engineering Estimated • Resource Availability Reviewed • Job Assigned and Scheduled • Customer Order Spec Communicated • Detailed Job Plan Developed

Engineering Assigned and Scheduled Sub-Process

Engineering Assigned and Scheduled

Demand Developed

Sold

Figure 2.4 (Continued)

Design Reviewed

Job Designed

Job Produced

Product Supported and Serviced

Order Shipped and Invoiced

Delivered

The enterprise is made up of revenue-producing businesses that conceive, sell, and deliver valued products and services to customers. The enterprise business goals are achieved through the performance of the individual business units. The business units are the basic engines, or Value Machines, that deliver the value and generate the revenues for the enterprise. The decisions around identifying and structuring business units are the first level of decisions a business makes about the structure of work. Inside each business Value Machine, there are two major systems required to deliver value to customers and financial stakeholders. 1. The Value Creation System (VCS), which is the structure of work required to create and deliver value (or, if you will, the “operating system” inside the Value Machine) 2. The Management System, which guides the creation of value Level 2: The Value Creation System Since our focus here is the structure of value-adding work, Level 2 starts with the drill-down into the components that make up the Value Creation System. (The Management System is examined in Chapter Five.) To provide value, a business must do three things, as represented by the three sub-systems that comprise the Value Creation System shown at Level 2. 1. Identify the customer’s needs for a product/service and then find, conceive, invent, design or obtain a product/service to meet that need. (Typically, this involves activities we commonly think of as product development, product launch, and product life cycle management.) We call this processing sub-system Product/Service Launched. The major output is the “successful launch of the right product/service,” as reflected by sustained sales and profitability of the product/service after launch. 2. Make customers aware of their need for the product/service and convince them that the business has the right offering available to meet that need. (Typically, this involves the activities we attribute to Marketing and Sales.) This processing sub-system is Product/ Service Sold, and the output is the “identification, capture, and retention of customers.” 3. Deliver said product/service to the customer. (This typically includes all those activities involved in order processing, making ready for installation, installation, invoicing, servicing, and warranty management.) This is the Product/Service Delivered processing subsystem, and the desired output is the “efficient delivery, installation, and maintenance (to the customer’s satisfaction) of the product/service.” The Value Creation System as a whole is a critical organization level, but it is seldom recognized and managed because of the highly visible resource dimension and the siloed ownership of functional areas that leaves nobody in charge of the entire Value Creation System. Yet the VCS goals are the direct connection to the customer and business. It is essential that the Process in a Value Perspective

33

goals of the three sub-systems of Launched, Sold, and Delivered be aligned with the VCS goals and with each other, and that none of the sub-systems be allowed to sub-optimize the total VCS. Level 3: Processing Sub-Systems Each of the sub-systems of Launched, Sold, and Delivered in turn is made up of the work processes necessary to achieve the goals of the sub-system. The Value Creation Hierarchy in Figure 2.4 shows the processes for a product-producing business, but the Value Creation System applies just as readily to a service business or a government or nonprofit organization. We are adamant that, regardless of organizational type, you can always find the equivalent of Launched, Sold, and Delivered sub-systems. However, as you will see, we don’t hold that there is a generic list of processes to describe the insides of each sub-system. Level 4: Process In Figure 2.4, the process-level example is an explosion of the “Job Designed” process shown in the Delivered sub-system. In this case, the process illustrated has four steps: order entered, engineering assigned and scheduled, job specs packet developed, design reviewed. Again, the steps in any given process should be unique to a business, appropriate to its industry, customers, and products. This is the level of end-to-end business processes—both those providing value directly to customers and those that support the value-adding processes. And at this level there are often differences in the design and execution of these processes by industry and by company. Level 5: Sub-Process/Task/Sub-Task The sub-process level is the link to the performer through the structure of work tasks and sub-tasks. An individual, a technology system, or a combination of the two ultimately performs the work of the organization. For technology developers who create software systems and applications to enhance performance at Level 5, it is vitally important that the requirements on which they base their designs are appropriately driven by the organization’s strategies, goals, and requirements, cascading down through the Value Creation Hierarchy.

KEY FEATURES AND BENEFITS OF THE VALUE CREATION HIERARCHY Why is the VCH an important and useful model? Here are the reasons: • Work/process definition starts at the top of the Value Creation Hierarchy with the business context. Each level of the VCH provides the critical performance context for subsequent

34

White Space Revisited

levels. At each level, you make unique “organizing work” decisions to optimize performance at that level—but in the performance context provided by the preceding levels. • All levels of process and process performance requirements are linked to customer expectations and business requirements (at Levels 1 and 2). • If you start below the Value Creation System level (that is, below Level 2) when defining processes, most likely those processes will not be directly linked to customer or business requirements, and they will fall into the dangerous sub-optimization zone, where it is easy, and tempting, to maximize the performance of one sub-process and thereby suboptimize the performance of the larger process or sub-system. And as we have pointed out, managers’ tendency to focus accountability on the resource dimension drives them to do all they can to look good, even at the expense of the larger system (which they don’t see anyway). • The VCH provides a roadmap for process practitioners, helping answer the questions, “Where am I operating in the VCH? Where should I be operating if I want to improve process performance and organization performance?” For the process practitioner, the first question should be, “What organization performance needs to be improved?” followed by, “What process performance needs to be improved to achieve that end?” The Value Creation Hierarchy makes it possible to align performance goals from the enterprise level to the performer level, as shown in Figure 2.5. Figure 2.5 depicts how the goals of a fictitious company can be established at enterprise level and then cascaded downward to each succeeding level of the Value Creation Hierarchy. • In the example, if a business had an annual revenue and profit margin goal (goal number 1), goals can be appropriately distributed down to each component of the Value Creation System, so there are sets of goals for the Launched, Sold, and Delivered sub-systems (goals 2, 3, and 4). • Then goals can be cascaded down to processes inside each sub-system. For illustration, Figure 2.5 shows goals distributed for the processes inside Delivered (goals 4a, 4b, 4c, and 4d). • Then it is possible to distribute goals down to each sub-process within the sub-system (goals 4a1–4), in this case the Job Designed sub-process. • At the fifth level, goals are assigned to Engineering Scheduler (goal 4a2). The result is a set of vertically derived performance goals that link the contributions of individual performers (in this example, the Scheduler) to a key goal of the enterprise (revenue and profit growth).

Process in a Value Perspective

35

Labor Market

Technology Providers

Suppliers

Human

Capital Market

Businesses

Any Enterprise

Regulatory/Legal

Product/Service Launched

Resources

Technology

Equipment

Materials/

Resources

Capital

Resources

Goals for Launched: • Enhance and reintroduce product A in four months • Launch product B in six months • Move new products C and D to Phase 3 in the development process in 10 months, in preparation for launch in 18 months

Level 2 Value Creation System

Value Chain

Level 1 Enterprise/ Business

Geopolitical

2

Product/Service Sold

3

Product/Service Delivered

Goals for Sold: Competition • Sales of $330,000,000 in next 12 months, distributed by product and new versus existing customers, as follows . . .

Customers

Markets

4 Product/Service

Goals for Delivered: Produce and install • X units of product A Products/Services at a unit cost of Y • 2X units of product D at a unit cost of Z • 3X units of product E at a unit cost of W

Services

Products/

1

Culture

Financial Stakeholders

Investments

Returns

Natural Environment

Order for Product/Service

Value Creation System

Management System

Management System

Economy

Business Environment

Figure 2.5 The VCH with Performance Goals

1

• Business XXX has an annual revenue goal of $300,000,000 and a profit margin of . . . • This is also the goal of XXX’s Value Creation System. • This Value Creation System goal (1) links to goals for each of the Processing Sub-Systems in the Value Creation System.

Demand Developed

Order Obtained

Sold Customer Relationship Maintained

Engineering Assigned and Scheduled Sub-Process

4a2

Job Specification Packet Developed

Programs and Applications

• Engineering Estimated • Resource Availability Reviewed • Job Assigned and Scheduled • Customer Order Spec Communicated • Detailed Job Plan Developed

4a1

Engineering Assigned and Scheduled

4a3

4a4

Job Designed

Job Produced

4a

4b

4c

4d

• Labor <x% of Service Costs • On-time Service >99% • Support Costs of $xx

Goals for Product Supported and Serviced:

Product Supported and Serviced

Order Shipped and Invoiced

Delivered

• Shipping Cost <x% of Unit Cost • On-time Shipping >99% • Invoice errors